I am a Tax Partner in WithumSmith+Brown’s National Tax Service Group and the founding father of the firm's Aspen, Colorado office. I am a CPA licensed in Colorado and New Jersey, and hold a Masters in Taxation from the University of Denver. My specialty is corporate and partnership taxation, with an emphasis on complex mergers and acquisitions structuring. In the past year, I co-authored CCH's "CCH Expert Treatise Library: Corporations Filing Consolidated Returns," was awarded the Tax Adviser's "Best Article Award" for a piece titled "S Corporation Shareholder Compensation: How Much is Enough?" and was named to the CPA Practice Advisor's "40 Under 40."

In my free time, I enjoy driving around in a van with my dog Maci, solving mysteries. I have been known to finish the New York Times Sunday crossword puzzle in less than 7 minutes, only to go back and do it again using only synonyms. I invented wool, but am so modest I allow sheep to take the credit. Dabbling in the culinary arts, I have won every Chili Cook-Off I ever entered, and several I haven’t. Lastly, and perhaps most notably, I once sang the national anthem at a World Series baseball game, though I was not in the vicinity of the microphone at the time.

Ten Things We Learned From The New Obamacare Investment Tax Regulations

8. Net loss from the sale of property can’t offset other investment income. Similar to the rules discussed at #4 above, if an activity is a trade or business that is neither passive to the taxpayer nor engaged in the activity of trading financial instruments, gain from the sale of assets (other than working capital) are not considered net investment income.

All other gains — for example, those from a passive activity or an activity engaged in financial trading – will be considered net investment income. Under the proposed regulations, the taxpayer cannot use a net loss from the disposition of an asset to offset other net investment income:

Example; Henry Hill, an unmarried individual, realizes a capital loss of $40,000 on the sale of P stock and realizes a capital gain of $10,000 on the sale of Q stock, resulting in a net capital loss of $30,000. Both P and Q are C corporations. Henry has no other capital gain or capital loss. In addition, Henry receives wages of $300,000 and earns $5,000 of gross income from interest. For income tax purposes, Henry may use $3,000 of the net capital loss against other income and the remaining $27,000 is a capital loss carryover.

For purposes of determining Henry’s net investment income, Henry’s gain of $10,000 on the sale of the Q stock is also reduced by his loss of $40,000 on the sale of the P stock. However, because net gain may not be less than zero, Henry may not reduce his interest income of $5,000 by the $3,000 of the excess of capital losses over capital gains allowed for income tax purposes.

Similarly, while a taxpayer’s net operating loss carryforward can be utilized to reduce their taxable income and modified adjusted gross income, the proposed regulations provide that it cannot reduce a taxpayer’s net investment income. The reason for this rule is obvious: it is not practical to trace what portion of a taxpayer’s net operating loss is properly attributable to investment income.

9. Long-awaited clarity on the sale of S corporation stock and partnership interests. Under the proposed regulations, stock in an S corporation or an interest in a partnership is not considered property used in a trade or business, and thus any gain resulting from a sale of such stock or partnership interest is considered net investment income.

There is an exception, however, for a sale when:

The S corporation or partnership is engaged in at least one trade or business,

At least one of the activity’s trades or businesses is not the trading of financial instruments, and

The activity is not passive to the taxpayer.

Read in the negative, one might conclude that if a taxpayer materially participates in an activity that is engaged in a trade or business that is not the trading of financial instruments, any gain would not be net investment income. While that is typically the case, a we’ll see below, the mechanics of the new regulations do not provide a blanket removal of the gain from the computation of investment income, but rather a mechanical adjustment to the gain. In certain circumstances, this may result in some gain being subject to the additional Medicare tax even if the the taxpayer meets the requirements above.

Here’s how it works:

Step 1: the taxpayer must compute the gain or loss on the sale of the stock or partnership interest,

Step 2: the taxpayer next looks through to the entity, and the entity is deemed to have disposed of all of its assets in a fully taxable transaction for cash equal to the fair market value,

Step 3: the hypothetical gain or loss is then allocated to the selling shareholder or partner (this is done in accordance with any special allocations required pursuant to a partnership agreement or Sections 704(b) or (c)), and

Step 4: the gain computed in step 1 is then adjusted to account for any gain that is not considered net investment income because it meets the three exceptions above.

There are limitations to the amount of adjustment in Step 4. If a taxpayer recognizes a gain on the sale of the stock or partnership interest, the adjustment cannot result in a net loss for net investment income purposes, nor can a taxpayer recognize more gain for net investment income purposes than he actually realized on the sale. On the opposite side, if the taxpayer recognized a loss on the sale of the stock or the partnership interest, an adjustment cannot result in a net gain for net investment income purposes, nor can a taxpayer recognize a larger loss for net investment income purposes then they actually realized on the sale.

An modified example from the proposed regulations will make some sense of it all:

Individuals A and B are shareholders of S Corporation (S). A owns 75 percent of the stock in S, and B owns 25 percent of the stock in S. During Year 1, S is engaged in a single trade or business. S is not passive to A, nor is S involved in the trading of financial instruments.

S has three properties (1, 2, and 3) held exclusively in S’s trade or business that have an aggregate fair market value of $120,000. On September 1 of Year 1, A sells his S stock to C for $90,000. At the time of the disposition, A’s adjusted basis in his S stock is $75,000. S’s properties have the following adjusted bases and fair market values immediately before the disposition:

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